Here is a long and nice article on the current macroeconomics issue by Paul Krugman. I must admit that I share the same view for some of his thoughts, particularly with respect to the misuse of economic models to explain the world and the argument that the market is perfectly efficient and can always maintain that condition. For further discussion, you can see my post here on the issues of Capitalism. To cut it short, I never believe that someone can explain how the market works through some sophisticated mathematical equations and models. Of course you need to make some calculation in economics, but don't expect that everything will work perfectly in accordance with the calculation, there are too many factors which are affecting the economics performance. Now, let us move to today's main theme. What exactly is Ketchup Economics? According to Mr. Krugman, this is related to the assets valuation method use by finance economists in determining whether asset prices are reasonable, i.e. they don't ask whether asset prices made sense because of its real-world fundamentals like earnings, but whether asset prices made sense given other asset prices. Using Larry Summers' parable, the simplified version would be as follows: The "ketchup economists" have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup, therefore they conclude from this fact that the ketchup market is perfectly efficient. Got the message? Using the Ketchup Economists logic of thinking, the fact that the prices of certain assets are going considerably up or down in certain periods should not be questioned as long as the prices of other similar assets are going up or down together. Without a doubt, this is dangerous. But how can we blame them for making this kind of assessment? If we take the assumption that the market is truly efficient, it is useless to make a price valuation based on the fundamental aspects of the assets, since it is the market force, the supply and demand mechanism, that will determine the exact value of those assets. Let me clarify first, while I do believe the concept of Invisible Hand, i.e. the best way to let the economy moves is by letting the force of supply and demand works automatically, I also believe that the market is not always efficient, there would always be a case where the amount of the supply or demand is too high or too low. There are many factors that can affect such amount of supply and demand, and I can assure you that not all of those reasons were made on a reasonable basis. Sometimes people are being in a state of high optimism and are willing to take more risks and then the economy moves forward, in other times people are being too pessimistic and then we're going through a recession. Then, what could be done? To be honest, I don't know yet. Many professional economists have tried to solve the problem, but no one has ever succeeded, so I don't think that I can provide the perfect solution. However, since most victims of the current crisis are major financial institutions, I would suggest that a better supervision mechanism should be implemented by the Government in the near future. We would also need certain regulations that will encourage financial institutions to have a better assessment on their business and investment risks and to ensure that they can always maintain a prudent approach with their risk management. I was quite surprised with the collapse of some major financial institutions back in 2008, it is just ridiculous that from all the possible companies to collapse, those who should actually be the most prudent companies are the ones who were proven not prudent and therefore collapsed firstly. In addition, since most of the major financial institutions are relying on rating companies in determining their risk of investment, it would also be helpful if the Government can start to have a meaningful discussion with major rating companies concerning their rating standards in order to create a better and more prudent rating mechanism. Further elaboration on this idea will surely be needed in the future.

I'm quite shocked with this piece of letter, especially because it was published in the New York Times. What's wrong with being a highly paid lawyer? Is it that bad to work as a lawyer in the United States? How come the shortage of job with high salaries is good for the development of law graduates? And, the most important question is, how on earth can someone made a claim like this: "as the jobs with large salaries disappear, law students will draw on the thoughtfulness, intelligence and perseverance that got them into law school in the first place in order to find employment that they actually find rewarding."

Is he trying to say that having a career as a lawyer would cause law graduates to lose their thoughtfulness, intelligence and perseverance??? Pardon me sir, but among many types of career that can be pursued by a law graduate, I find that being a lawyer provides the biggest opportunity for a law graduate to maintain and increase their thoughtfulness, intelligence and perseverance. It goes without saying that a good lawyer must combine all of those three qualities in order to survive in their job.

Any law firm who truly cares about the quality of their work and talents would be most probably establish a system which will ensure that all of their lawyers are able to maintain those three qualities. These include proper distribution of work, work review mechanism, and systematic training program. Why I believe that those three qualities will be maintained and increased by becoming a lawyer? See some examples below:

• If you want to train a lawyer's perseverance, throw him into a very boring due diligence exercise. It's very important, but everyone knows that it's an administrative paper work. Those who can survive the hellish due diligence exercise will not doubt have a perseverance of a true knight.
  
  
• If you want to train a lawyer's thoughtfulness, throw him into various negotiation meetings with clients and their counter parts. The first experience will always be scary, but it will definitely train his ability to think and act carefully, as he will have to respond to on-the-spot questions and he will need to understand his clients needs and translate those needs into commercially acceptable legal terms. He will also learn to act in a professional manner all the time to ensure that he can gain trust from both sides.
  
  
• If you want to train a lawyer's intelligence, throw him into structuring a complex transaction or make him do some advisory works. That would done the job easily.

And come on, how can someone says that having a job with less salary is good? No sir, that's not good at all. You ask people to be happy with less salary? You're saying that dreaming a career in a big paid law firm is not worthy to be pursued? My suggestion, if you want to cheer up these poor law graduates about their prospective careers, find a better reason next time.

In my post dated 26 August 2009, we have discussed the basic concepts of Libertarian Paternalism, introduction to better policy making, and examples of human errors with respect to daily economic activities. Today, we will discuss some useful guidelines in making better policies and how to implement such guidelines in actual life.

The Six Guidelines of Better Policy Making

According to Thaler and Sunstein, there are 6 basic guidelines for better policy making:

Each will be further discussed below:


1. Expect Error

I guess this is the first guideline to be considered by policy makers. Since most men make mistakes, a good policy will consider such fact and will ensure that the mistakes can be fixed in the easiest way.

What is the actual implication of this guideline? While governments or private institutions can try their best to design a good policy, they must be aware on the possible failures due to human errors and must ensure that the system will be able to sustain and fix such problem. There are many examples for this problem, but let me show a very interesting case as provided by Thaler and Sunstein, that is the case of birth control pills. Some of you might be aware that in one month, most women will take birth control pills for about three consecutive weeks and then stop for one week (due to the menstruation period). Many women have difficulties to adopt to this system and some of them may forget to take their pills in accordance with the required schedule. So what the companies do with this condition? They provide 28 pills in 28 containers, each having a specific number from 1 to 28. However, pills in containers no. 22 till 28 are only placebos made for the sake of compliance by human users, and thus they don't have any effect whatsoever. Interesting isn't it?

2. Default
The "Default" guideline is made due to the fact that most people will take the options which require the least effort, or in other word, people would instinctively take the easiest route in doing something (seems familiar?). In our daily life, the "Default" option represents an option that, if the chooser does not do anything, will cause most people to end with such option, whether the option itself is good or bad. The case will be stronger if there is any suggestion (explicit or implicit) on such "Default" option, i.e. people will most likely take such option without much hesitation.

In reality, we can't avoid this "Default" problem. Governments and private options in many cases need to provide "Default" option, such as the default choice of menu in a fine-dining restaurant or the default choice for investment policies in your pension funds. Now, since the "Default" option is very powerful, it would be best to ensure that any "Default" option is made for the benefit of the people. How can we do this?

There are two possible ways. First, we can design that each "Default" option requires an active approval from the relevant user. This means that a "Default" option will only be applied once it has been approved by the user. However, in several cases, some people ended up with having no benefit simply because they are too lazy to activate their own "Default" option.

The other way is to design the best possible policy that can be made by the government or private institutions and then such policy will be made as the default option, whereas any people who don't agree with such option will always be free to opt out. Take as an example your computer's download system. All major software company requires the user to actively choose whether they want to download a file or not for each downloading session as a default option, instead of the automatic downloading system. Why? Simply because downloading a file automatically might be dangerous (e.g. causing computer virus attack) and you'll need to properly asses such risk whenever you are trying to download a file. Simple, but important. And in each case, you can always change the setting (of course, if your administrator permits you to do that).

3. Understand Mapping
The third guideline deals with the fact that most people will have some difficulties when they are facing complex choices. A good policy will provide some mapping mechanism to its users, enable them to review the possible options in an easier manner and will allow them to choose the best option for them. In other words, we're talking about better disclosure to the public.

Now, let me ask you some simple questions, do you really understand the actual costs for using your credit card ? Or how to calculate your telephone bills? I bet that most of us wouldn't even know.

That's why we need a regulation which would require companies to have better disclosure system. The implementation of the "Understand Mapping" guideline should be cheap and will maintain the basic freedom of choice for consumers. It would also be good for the business because it can increase fair competition without having to use excessive litigation method (such as the use of Anti Monopoly and Unfair Competition Commission) or forced price control.

As an example, let us see the telecommunication industry. Imagine that the Government now requires each telecommunication provider to provide all relevant information related to the costs of their services and to provide a simple costs comparison with other providers. The information should also be easy to be obtained by all consumer. With this kind of policy, we would have a better understanding on the actual costs for using telecommunication services and can easily spot the best provider which would satisfy our needs. Each telecommunication company will also have better incentives to increase their business efficiency and to optimize their services due to this information disclosure system. Wouldn't that be nice?

4. Give Feedback
It goes without saying that a good policy will be able to provide a feedback to the user, whether they have done well, or were actually making mistakes. A nice example provided by Thaler and Sunstein is our internal computer system that warns us before our computer battery completely runs out.

Based on this guideline, I also have an idea where there is an integrated system to supervise the use of credit cards by each person. We know that each credit card has its own limit. However, in many cases, rather than acting as a limiter for people in using credit cards, such limit encourages people to spend their credit cards up to its maximum limit, and in some other cases, people tend to obtain many credit cards to increase their total credit cards limit. All of these are totally wrong.

Now, by using this integrated system, the banks would know how many credit cards are owned by a person, including each of their limits. Whenever certain amount of the combination of the limits have been reached (which should be in accordance with the credit worthiness of the user), all of the credit cards wouldn't be available for use. We have this supervision system for banking loan and credits application, why not for credit cards? We can help many people by using this kind of system. Remember, having many credit cards doesn't mean that you're becoming richer.

5. Structure Complex Choices
Actually, this guideline is deeply related to Guideline no. 3. When people are facing complex choices, they tend to simplify the choice. That's why a good policy maker will structure its policies to be easily understood and choosed by the user. One of the most useful methods that is being widely used is the "Collaborative Filtering."

Don't be afraid with the name, since it's basically a public review system and the internet really helps the development of this method. As an example, when you want to buy a law textbook and you have many choices but don't have enough time to read all of the available books, what would you do? You'll ask other people's opinion right? In the world wide web, you can simply search the title using Goggle or Yahoo and then you can see whether any people have made a review on such book. It is easy, cheap, and in most cases would be helpful for us in making an efficient decision.

6. Incentives
This is my favorite guideline and has been discussed various times in my other posts. It's very simple, people respond to incentives, they actually calculate the costs and benefits of everything, though maybe not as complex as a professional would be. Therefore, a good policy should always calculate the best incentive to be used in order to make such policy can be effectively applied.

Some legal scholars claim that currently most regulations are no longer effective to bind the people and therefore they are questioning the efficacy of the law itself. If only these people understand the basic nature of men, they would not say such a thing. You can't expect people to follow the law if you don't provide a suitable incentives for them. If you think that people will act according to a law only because of morality or religious reasons, I suggest that you need to reevaluate again your idea, or I'm afraid you will be frustrated.

I wouldn't provide any examples for this guideline as I believe you have seen many in my previous posts and I assure you that you will see more in my future posts.
Concluding Remarks

I hope this article can enlighten you on how the government and private institutions should design a policy which would maximize the benefit for the people without minimum cost to the people's freedom of choice. I personally agree with most of this Libertarian Paternalism movement, but I need to put some qualification here. What matter most to me is finding the most effective policy in improving people's live, so when the circumstances show that preserving free choice would not be efficient, some other methods would be needed. This is especially relevant when we're dealing with major criminal acts, such as terrorism, money laundering, and corruption. Of course it would be really nice to reduce these criminal acts by using positive incentives, but don't put too much faith on that.

All right, this is indeed a hilarious post from Greg Mankiw. The statistics show that children from higher income families are getting higher average SAT scores, and some people claim that there is a correlation between income and better result of tests. However, Mr. Mankiw theorizes that the correlation is not on the income rate, but on the fact that smart people are making more money and these people pass their genes to their children, thus smart children comes from smart parents not from rich parents. Okay, I'm not a professional statistician, but when dealing with statistics, I always remember what David Hume, a Scottish philosopher, has taught us on making a conclusion from our experience: just because in your experience an act is always followed by the second act does not mean that there is a causality between the first act and second act.

In Nassim Nicholas Taleb's wisdom (taken from his book "Fooled by Randomness"): "no amounts of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion." If translated: even after going through 1,000 successfull experiments, you will never be able to claim that a hypothesis is correct with 100% degree of certainty, but it will only need one failed experiment to reject such hypothesis. I agree with both of Hume and Taleb.

Previously, I have made some hypotheses with certain logical reasoning in my blog. Will it always be correct? Of course not! Situation and condition may change or maybe I haven't considered all of the relevant issues and facts, or maybe there is a fallacy within my seemingly fine argument. Mr. Mankiw is correct in saying that the ones who conclude that there is a relationship between family income and better test results might be wrong, but I also dare to say that his conclusion might not be correct either. Are there any relationship between smart people and their incomes, i.e. the smarter you are, the higher your income? I don't know, though I do know some rich stupid people and some poor to average smart people. Further, how many data should we collect before we can make such conclusion? Again, I don't know. My advice is simple, be very careful when we are dealing with statistics as people can always make different conclusions and interpretations from such statistics. When you think that a correlation between facts exists based on a result of a statistic, you better think it through again.

Yes, according to Lucian Bebchuck, a law professor from Harvard Law School. A guaranteed bonus may, to certain extent, create distortion in determining the business risk of a company. By having the benefit to receive a guaranteed bonus no matter what the performance of the company, there would be a considerable pressure for the management to meet the company's business target or even exceed such target. As a result of this, the management may take unnecessary risks in doing the business just for the sake of getting better performance. We need to understand that in some cases, riskier business decisions may provide higher results, but they may also cause greater losses. When the results are losses, who would be the largest victim? The Company and also the shareholders.

Further, Prof. Bebchuk theorizes that if the bonuses of the management were distributed based on the overall performance of the company, say after reaching a minimum amount of annual profit, the management will have better consideration in doing the business, i.e. they would only take the risks if the odd of getting the intended performance are higher than the odd of getting a lower results. Why? Since the management bonuses are now tied to the performance of the company, it would be dangerous for them to take too much risks because if the results are bad, they will also lose their bonuses. As a result, they would play safer.

Again, this shows how incentives work in our life. I would love to see how this will be implemented in Indonesian regulations. While I absolutely don't agree if the regulator is trying to limit the amount of benefits that can be obtained by the management, a policy on how to structure the best benefit package should be okay, provided that companies can freely choose to adopt such policy or not (as will be determined by the shareholders and, if possible, an independent remuneration committee).

To certain extent, the answer would be yes. Why? See here (it is in Indonesian language, but no worries, we will only discuss one article and I'll provide the translation below). On 9 July 2009, the Indonesian Government issued Law No. 24/2009 on the Flag, the Language, the National Emblem, and the National Anthem. The title says it all, so I don't expect to provide a summary of this Law in my blog. While I don't see the necessity to have this kind of regulation, I can understand that the Government is trying to increase Indonesia's profile, particularly the use of Indonesian language.

Now, onward with the main theme for today, I have some concerns with the application of Article 31 Paragraph (1) of this Law, which states (unofficially translated):

"The Indonesian Language must be used in any memorandum of understanding or agreements which involve state institutions, Indonesian government agencies, Indonesian private institutions, and Indonesian individuals"

This is a provision that I would call as inefficient and unreasonable. Why oblige parties to use Indonesian language in their contracts? There are many reasons for Indonesian companies to use foreign languages (notably English) for their contracts with another Indonesian parties, such as: (i) the relevant Indonesian company has several foreign creditors and therefore most of its contracts were made in English so it would be easier for its creditors to review such contracts (if necessary); or (ii) the relevant Indonesian company usually enters into contracts with foreign parties and therefore its standard contracts were mostly made in English. We need to understand that the costs for drafting Indonesian version of the contracts are not always cheap, so I'm asking once again, why force them to use Indonesian language and penalize them with unnecessary costs? If the parties need to use Indonesian language for the best interest of both parties, they would do so without having to be forced by this Law. Having this kind of provision is indeed an exaggeration.

In addition, forcing Indonesian parties to draft all of their agreements in Indonesian language may cause unnecessary risk (due to its ambiguity), i.e. Indonesian parties with bad faith (of course, supported by their lawyers) may claim that contracts made with another Indonesian parties are invalid and should be annulled by operation of law simply because such contracts were not made in Indonesian language. That would be horrendous! What should be considered as an administrative breach can now be deemed as a major breach of law which could cause a contract to be annulled, all because of an ambiguous provision which shouldn't even exist in the first place.

Of course as a lawyer, I would love this provision since it will create additional job for lawyers, i.e. translating standard English contracts into Indonesian language. Sure it's a boring stuff, but it can generate some nice incomes :).

A Libertarian Paternalist is someone who believes in Libertarian Paternalism, but since I'm guessing that most people wouldn't even know the definition of Libertarian Paternalism, you can check the definition here. So, why are we discussing this issue?

I have just finished reading a book titled "Nudge," and a very interesting book it is. Made by Richard Thaler and Cass Sunstein (Professors of economics and law at the University of Chicago, respectively) this book introduces the movement of Libertarian Paternalism, a movement that supports governments and private institutions to adopt policies which can maintain or maximize people's free of choice while in the other hand influence those people to improve their life and important decisions, such as wealth, health, and happiness. The basic reasoning is quite logic, people make errors most all the time and in reality, there is no such a neutral design in making a policy, so why don't we maximize the possible choices for the people, design the most possible best options, encourage people to take the best options, but ultimately let them also be free to take their own actions with regard to the choice alternatives?

The book also offers several forms of incentives and methods that can be used by governments and private institutions to improve people's life in accordance with the Libertarian Paternalism movement. For someone who are trying to find how to structure the best policy or regulation for certain issues in this life, I find that this idea is enlightening.

Human = Error?

I have to admit that the idea that common people tend to err on a regular basis is quite disturbing. However, there are too many supporting facts on this issue that would prevent us from declaring the idea to be baseless. See this site for additional insights on human errors, especially with respect to daily economic activities (by the way, Dan Ariely's book, Predictably Irrational, is also highly recommended).

While I believe that men are rational beings, i.e. able to think rationally and make decisions on a reasonable basis, I can't deny the fact that our decisions are subject to various internal and external factors, and these factors may take a dominant position, even more dominant than our own rationality. Let us face it, how many times did we make a decision based on a cool and wise demeanor? I bet that most of us will answer: seldom. In most cases, decisions are being made by our impulsive side, the automatic system in our mind which is very vulnerable to biases and blunders. Not to mention our weak self control, overconfidence, excessive ignorance, and tendency to follow the herd (i.e. going with the trend without too much thought). All of these factors may negatively affect our ability to make a better choice in our life.

See some of these interesting examples:

1. On Procrastinating
Procrastinating is always be a big problem for most of the people. You might be familiar with these statements: "I'll save money as soon as possible," "damn, I'm getting fat, I should exercise tomorrow," or "well what do you know, the deadline for the paper is still three months, I guess I'll take a break for a week and finish it later." Yes, most of us procrastinate, including myself. But how come? Aren't people aware on the danger of being obese, or retiring from a job without any saving? Then why people still procrastinate? Is it due to irrationality or an overconfidence or simply an inability to grasp the actual risks associated with our actions?

Have you ever think why some governments issue mandatory pension plan for their citizen, where the citizen is forced to put some of their salaries to their pension account? I dare to say that this is one of the reasons.

Having a mandatory pension plan is a positive nudge, although of course how we should structure such plan to reach the maximum results is another case to be discussed. By having a mandatory pension plan which automatically enrolls worker to some form of pension funds, the government may save people from being poor after their retirement due to low saving. True that the pension plan can go bust, but the risk is smaller than letting people not having any pension plan.

2. On the Ownership Bias
Several researches made by Thaler & Sunstein and Dan Ariely reveal that people are having difficulties in determining the value of certain goods due to the ownership problem. Those who possess an asset tend to value their asset higher than those who don't posses such asset, and the discrepancy of the value can be very, very huge. In one of Thaler & Sunstein experiments, participants are being given a mug or a chocolate bar having the same price. Half got the mug and the other half got the chocolate. Interestingly, when they are being asked to trade their mug with the chocolate and vice versa, only 10% of the participants are willing to trade. Why?

In another case, Dan Ariely made an experiment using college students where some of them successfully obtained a ticket for a really famous university basket ball final competition and the others failed to do so. These tickets are very hard to obtain, and most students must spend their nights in tents just to have an opportunity to get lotteries for getting the tickets. Yes, lotteries! Even after spending two days in tent, they still need to push their luck to get those tickets. However, despite the difficulties in getting those tickets, there were many students who participated in getting the tickets.

After the tickets distribution, Dan contacted students from both sides to find out how much they value their tickets, and he found a very amazing result. In general, those who failed to obtain such tickets were only willing to pay max US$170 for buying one ticket, whereas those who obtained such tickets were only willing to sell their ticket for a minimum of US$2,400 per ticket. This is amazing, especially when we considering the fact that before the distribution of the tickets, almost all students were very eager to obtain the ticket.

So, what is the effect of this ownership bias? Because people tend to value their owned goods higher and hates losses for whatever they cost, they would be more likely stick with their current holdings, even when such condition is not always better. In a more complex way, the ownership bias can be used to lure consumer toward what Dan Ariely calls the "virtual ownership," i.e. making people think that they have ownership over an asset in order to increase the opportunity of such people to purchase the assets with a higher value. One example is where your cable TV operator provide you with a "gold package" limited trial period with a discount. after certain period of having a standard package. When you try it for the first time, most of you would probably think that if you don't like it, you can always back to the standard package, or say, downgrade it a little to the "silver package." But in reality, most people tend to just stay with the gold package after the limited period expire even though the price has become more expensive. Why? Because people hate to lose the facility that they have obtained previously.

Ask yourself, it's hard to downgrade your quality of life right? As long as you have sufficient funds, you would most likely try to maintain your quality of life, even if it is getting more and more expensive, rather than to cut some expenses and save more money from the cutting. So don't be confused when some people claim that the richer you are, the bigger your expenses will be.

3. On Free Items Bias
Other experiment made by Dan Ariely shows our fragile way of thought when we are dealing with free items. The experiment was done in a halloween day where Dan gave chocolates and candies to kids wearing costumes. At first, he would give these kids three small Hershey candies and then give them 2 options, i.e. (i) if they are willing to give him back one candy, they'll get a small Snickers chocolate bar; or (ii) if they are willing to give him back two candies, they'll get a big Snickers chocolate bar (twice the size of the small Snickers). The Hershey candy itself only worth 1/10 of the big Snickers.

In the first experiment, almost all children successfully pick option No. 2. However, in the second stage of the experiment, Dan change the condition, i.e. (i) they'll get a small Snickers chocolate bar for free without having to give any of their Hershey candy; or (ii) if they are willing to give him back two candies, they'll get a big Snickers chocolate bar. Interestingly, now most children take the first option which, if viewed by a rational man, should be considered as a very bad choice. Again, how come? It is also interesting that Dan repeated a similar test to other people, including college students, only to find similar results! Seems that there isn't much development in human behavior when we're dealing with this kind of issue as children and adults encounter similar results.

It doesn't take a genius to understand that the free item bias have been used many times for business marketing purposes. Try to think of some, and you'll soon realize it. Next time, when you go to a sale, try to compare, would it be better to have a 50% discount or a buy one get one benefit? Or, what is better, having a 30% discount or a buy 2 get 1 benefit? When you're getting this question, you will start to think carefully in determining the best option. But, if people are not thinking it through, I dare to say that most people will take the buy one get one or buy two get one benefit.

Rational Imperfect Beings and The Need to Design Better Policy
We have discussed above some examples of the great ability of men in making errors in daily life. But let us don't forget that men is able to think rationally, men respond to incentives and information. We might be imperfect beings, but it doesn't mean that we are completely irrational. If the government or private institutions can design a better policy which will encourage people to really think deeply about their life and decisions, wouldn't that be very good?

What are the criteria for designing a good policy? You'll have to wait the second part of my post. So please be patient on that :).

You can read the 250 pages of the SEC Regulation (which include the proposed amendments and a thorough review of such regulation from the SEC team complete with list of detailed questions asking for public comments) here, and if you are also interested to read the US lawyers' comments on that SEC Regulation for some additional insights, you may read the 40 pages comments here. Be warned however, considering the total pages of those documents and the fact that they deal with complicated US securities regulation, it would be wise if you don't waste your time to read them unless you have a legal background, consider long and complicated reading materials as entertaining, and have absolutely nothing important to do :). Of course, you can simply read a quick summary of the main issues of such regulation below.

Summary of the SEC Regulation

Okay, since this SEC Regulation also deals with certain issues which might only be applicable to US Laws, the summary below will only cover the main issues which might be relevant for Indonesian corporate law, i.e.:

• the main purpose of the SEC Regulation is to increase public shareholders participation in determining management candidates for the relevant publicly listed company and to increase information transparency of the candidates themselves;
• to satisfy the above purpose, the SEC Regulation requires publicly listed companies to provide information on the candidates in the proxy materials for the shareholders with respect to a general meeting of shareholders; and
• the SEC Regulation also tries to determine the qualification of shareholders who can propose candidates of management members, which include having a minimum percentage of shareholding and a minimum period for holding the shares in case their proposed candidates are successfully being elected as the management of the company.

With respect to the above proposed provisions, the Professors from HBS and HLS recommend the SEC to adopt such regulation with the following recommendations:

• the minimum amount of shareholding percentage for proposing candidates of directors and commissioners shouldn't be too small (the SEC Regulation proposes 1% but this amount will also depend on the total capitalization of the relevant publicly listed company), as it may cause too many competing candidates for leading the company;
• the main point of this SEC Regulation is to have more information on the candidates and if possible, new people on the board of management, not for the sake of making trivial contests, therefore, the threshold for proposing candidates should be increased, say around 5-10% provided that this threshold can be further reviewed in the future in accordance with the relevant situation and condition; and
• there should be a minimum period for holding the shares of the relevant publicly listed company after the appointment of the relevant shareholders' proposed candidates is successful, say at least 1 year, just to make sure that the appointed directors/commissioners and the shareholders are serious with the long term development of the company.

Why am I Interested with this Particular SEC Regulation?

It's quite simple though, until today, Indonesia does not have a specific law which deals on how public shareholders of a publicly listed company can propose candidates for the directors and commissioners of such company and when the information on such candidates should be available to the public.

Under the current Indonesian Company Law, any shareholder(s) having at least 10% of the total shareholding of a company (unless the articles of association of the company provide a lower threshold) would be able to propose a general meeting of shareholders (including proposal of the agenda of such meeting). So in theory, if you satisfy the 10% threshold, you should be able to propose your own candidates. However, I haven't heard the actual application of this concept in publicly listed companies.

In addition, it is almost becoming a general practice that the information on the management candidates will only be provided on the date of the general meeting of shareholders. As a result of which, shareholders often do not have the privilege to review the candidates competency beforehand and may not have complete information in determining the best candidates for the management position.

Having said the above, I would like to analyze whether at this current stage Indonesia should be required to have a similar regulation with the above one. Of course, I don't expect that we will have a detailed and sophisticated regulation like in the US, we're talking about the principles only. The drafting of such regulation should only be discussed after we can clearly agree that the regulation itself is needed.

The Necessity of Having Better Transparency and Fairness to All Shareholders

Balancing the relationship between the management and shareholders of a company will always involve some problems, particularly because there are no perfect guidelines on how the management should maintain the relationship with the shareholders. Some legal theorists argue that the management is, to certain extent, acting as the agent of the shareholders, and therefore must act for the benefit of such shareholders. But then again, some of them also argue that the management should act to the best interest of the company, whereas, the interest of the company may differ from the interest of the shareholders.

While we can talk anything in theory, in practice we would need to understand that since the management is appointed by the shareholders (and of course they can always be replaced by the shareholders), there would always be an incentive for the management not to acting in the best interest of the company, particularly when such action might cause them to lose their position or possible remuneration. As a result of which, when a company is being massively controlled by certain controlling shareholders, the possibility of management breaching their fiduciary duty to the company would be most likely increased.

However, the case can also be turned the other way around, that is, if the shareholders of the company are too diversified and no one has majority control over the company (such as in certain publicly listed companies), the management of those companies would be in a stronger position to determine their own actions and rewards and will have less incentives for having better accountability toward the shareholders.

In both cases, the victim would mostly be the public shareholders, i.e. those who cannot be considered as the controlling shareholders. Indeed, Indonesian laws have provided some form of protections for these kind of shareholders, such as the right to request the company (or any third parties appointed by the company) to purchase their shares with a fair price in case they suffer losses due to decisions made by the general meeting of shareholders or the management of such company. For publicly listed companies, the case would be easier. If the company's shares are liquid, the shareholders who don't agree with the company's decision could simply sell their shares in the market.

While this protection mechanism can be considered as a good policy, it has one significant problem, i.e. it encourages public shareholders to leave the company instead to stay for a longer period. What happen if those shareholders actually believe that in the long term the company has a very good prospect, but because of the current condition, they are "forced" to sell their shares? And how about institutional investors who may have quite a huge amount of shares though they are not yet considered as controlling shareholders? They may face some difficulties in selling their shares in the market.

Further, the most important question is why we penalize the company to purchase the shares of the public shareholders who don't agree with the decisions made by the organ of the company? Wouldn't that be counter productive for the growth of the company itself?

I always believe that giving more choices to the public would benefit us all. Therefore, it would also be better if we can have a regulation which can increase public shareholders' participation in determining candidates of the management of the publicly listed companies, including better transparency with respect to information on the management candidates and fairness to any shareholders to propose their own candidates (provided that they satisfy the minimum threshold for shareholding). In this case, adopting a similar regulation with the SEC Regulation would be recommended by me. Further comments from the HBS and HLS professors should also be considered as those comments are very relevant in ensuring that the regulation is workable enough in

One question remain though, what would be the use of giving the opportunity to public shareholders to propose their own management candidates if in the end they will not have sufficient votes to approve the appointment of their candidates since the controlling shareholders do not agree with the candidates? This is particularly relevant in Indonesia where it is very rare to find a publicly listed company which does not have any controlling shareholders.

To solve this issue, it may be possible that the threshold of appointing candidates proposed by public shareholders shall be reduced to allow voting by minority shareholders or that the controlling shareholders shall have no votes with respect to the appointment of such candidates. (as if in a conflict of interest transaction). Further discussion on this issue would be definitely useful.

To end this article, it is important to note that while having better transparency and fairness for public shareholders in determining the management candidates might help a company to increase its performance, it wouldn't be quite effective unless there are other incentives which may directly affect the behavior of the management. In this case, I refer to the remuneration system of the management. To see my proposal on this issue, I recommend you to read my post on 17 August 2009, where I discussed the use of independent committee in determining the remuneration of the management.

This article is inspired from my discussion with Rob Baiton related to his post, Fatwa and Terrorism. The problem of terrorism is always an interesting theme for me, particularly because I absolutely hate terrorism (for whatever reasons) and because I wrote my thesis on the retroactive implementation of the Indonesian Terrorism Law to the 2002 Bali Bomb Case. In this case, retroactive implementation means that a law is being implemented to a case that occurred prior to the enactment of such law.

In my thesis, I analyzed the Constitutional Court decision which annul the above retroactive implementation, and after conducting an in-depth research including on the historical background of the non-retroactive principle of criminal law, I disagreed with such annulment. To cut it short, for me, when we are dealing with extraordinary crimes, we should also use extraordinary actions to combat them. This is not a place for someone to say something like: "then what would be the difference between us and the terrorist?" That might look interesting in a movie, but in reality, sometimes we are forced to do some radical things in order to put down dangerous and illegal actions.

Now, I will elaborate some of the basic ideas that have been previously discussed with Rob, i.e. what kind of policy which would work best to reduce terrorism, and whether we can use a law that penalizes people for a crime conducted by their closest relatives.

The Inside Mind of the Terrorists

Why were some people attracted to conduct terrorism? Why did they become terrorists? To this question, I would reply: poverty, low education, lack of affection, being depressed, and under constant oppression. Or in other words, terrorism are mostly being conducted by those who were considered as remnants of the world. Of course, for the terrorist leaders, the reasons might be slightly different, i.e. they must gain some benefits for doing terrorism, such as money and power.

In my opinion, religion teachings (or basically any type of ideology) are not a solid reason for conducting terrorism, they might be twisted to support terrorism, but they'll never be strong enough to bring people to actually "pull the trigger". And the reason is quite simple, no reasonable man having high level of education, good flow of income, lots of affection, living his life to the fullest with minimum or no oppression at all would do terrorism acts and wasting his life in the name of a religion unless he is crazy, absent minded, having some lack of mental capacity, or being brainwashed. It just doesn't make any sense. I'm a moslem, and if a clergyman comes to me and asks me to be ready to die for the sake of a crappy holy war, I would simply reply, "no thanks sir, I believe that the heavenly girls are currently reserved for you. So you should go first, remember, they are waiting, now shoo, shoo."

I always believe that most men will act based on the incentives provided to them, be it positive or negative, and terrorism is not free from these kind of incentives. As an example, why terrorist leaders and planners choose miserable men as their main target for brainwashing? Encouraging a miserable man to do a suicidal bombing must involve some good incentives, or else that man would not be willing to sacrifice himself. However, and this is the most important part, I'm quite certain that the costs for making a miserable man to sacrifice his life would be most likely cheaper than making a happy man to do the same act. Thus, there is a great incentive for terrorists to recruit the miserable men instead of the happy men.

So, What are the Incentives for the Miserable Men to Conduct Terrorism?

There are many incentives for miserable men to conduct terrorism. Being in their current state, that is having a miserable life, an option which will somehow make them a "hero" (by killing the enemy of the religion/ideology) and enable them to move to a better place (i.e. heaven, whatever the concept is) would be much appreciated. It is a general knowledge that people might experience a low mental awareness due to certain bad conditions, and during such period, the terrorist leaders will be most likely have the best chance to "brainwash" those poor people.

Another good incentive would be in the form of financial compensation for the families left behind. You see, it is common for the family members of the dead terrorist to receive a quite generous donation from the terrorist leaders to make sure that their future life will be secured.

Having all these kind of incentives, it is no wonder that some people would be willing to sacrifice their life. In some case, the benefit might be higher than the cost! Of course that is from the terrorist's point of view, not mine.

How Should We Prevent Terrorism?

We can say anything about the terrorist, saying that they are a bunch of cowards, losers, etc. But I don't think we can blame these guys entirely. Unless we can get and banish all the leaders, there is almost an unlimited supply for terrorists. It is too easy to find miserable men in any part of the Earth, there are too many people living in despair. In any case, picking one of them would not be that hard.

So what should we do? Surely, trying to banish terrorism by advancing the life of all people would not be a viable option, because I'm afraid that we can't achieve that even until the end of time. I understand that one of the proposed solutions is to cut down the blood supply of the terrorism, i.e. money by increasing legal enforcement to money laundering activities. This is good but I would like to propose another radical, if not crazy, solutions.

Why don't we enact a law which would "penalize" not only the terrorist, but also the closest relatives of such terrorist, i.e. parents, siblings, spouse, and children, of course provided that those terrorists have been deemed guilty based on a final and binding court decision. When I'm talking about "penalize," please don't associate it first with prison and any other type of torture. I could understand that the idea of punishing someone for the mistakes of other people is not generally accepted in this modern world (though I believe that this concept is still being recognized in some part of the world, including in some Indonesian customary laws, such as if a man conduct a certain type of crime, his family member must pay some fines in the form of cows to the village).

The form of sanction could be many. What I'm thinking right now would be a type of sanction which would cause some financial losses such as fines or additional rate of tax, and give peer pressures such as announcement of the name of the family members to the public. The most important thing is that these sanctions must be made known publicly as wide as possible to the society.

The Ratio for Giving Sanctions to Closest Relatives

Why give additional sanctions to the closest relatives? There is two basic argument for this, first, miserable terrorists who choose to end their life by their own choice would be most likely have no fear of death, instead they embrace death. Thus, even the death penalty would not be sufficient to cause fear to these kind of terrorists, and in some ways, it might even strengthen their conviction to die in the name of God or whatever they want to believe, making them something like a "hero." You could easily spot this from the trial of Bali Bombers, those who are convicted as the main culprits act as if they all are ready to die, some of them even make books about their so called "struggle" for an Islamic country! This is ironic, we want to make them feel sorry for what they did, not becoming proud of it.

That's why we should put our action to a different side, i.e. the closest relatives of those terrorist. With the current technology, it would be easy for us to find out the family member of convicted terrorists and this should be workable from practical point of view. From the terrorist view, family members are most likely important. It's human nature. Even the most cruel terrorists would not want something happen to their beloved ones. "God" might be important, but when they know that the government will target their parents, spouse, siblings and children, what will the terrorist do? Bringing all of them? For how far? Wouldn't that also limit their movement?

By giving a threat to the family members of the terrorists, I believe we can provide the best incentive to prevent terrorism, at least this can distract them from their movement.

Second, this policy might also provide an incentive to the rest members of the family to prevent any of their member to fall to fundamentalism trap. Since no one would like to bear the consequences of the actions of their "crazy" family member, supervision among family member should increase, and this might prevent the fundamentalism movement to spread its words. Government can not efficiently prevent fundamentalism movement, especially with the current technology. But closest relatives can, and they could actually do that efficiently, simply by putting more attention and affection to their family members, their beloved ones.

You Know, Your Idea is Still Somewhat Crazy

Yes, I know that this is a crazy idea. I would be glad to receive a better policy which would provide better incentives to each family in preventing their members from getting trapped by terrorist movement. So for know, I'll stick to this idea.

But, just to make it clear, my idea focuses on using the power of incentives in preventing terrorism, and other than using legalized sanctions, I'm also interested in using peer pressure method. Maybe it would be good if we have a great marketing team who will advertise the evil of terrorism, starting by having sad testimony from the family members of the terrorist. Yes, the terrorist, not the victim, remember to focus on their loved ones first, because for most terrorists, the victim will be considered as enemies who deserve to die, so focusing on them wouldn't work best to prevent terrorism from the terrorist own perspective. Anyway, hope it's useful and can generate a better solution from the readers.